What is 'retained earnings'?

Retained earnings refer to the portion of net income that is kept within a company rather than distributed to shareholders in the form of dividends. When a company generates profit, it can either distribute these earnings to shareholders or reinvest them back into the business for growth, expansion, or other operational needs. The retained earnings account reflects the cumulative total of these reinvested earnings over time, contributing to the company’s equity.

This option highlights the fundamental concept of how companies utilize profit to support ongoing operations and strategic initiatives, thereby enhancing financial stability and potential for future profitability. This practice is crucial for long-term growth and is a key indicator of how efficiently a company is managing its resources.

The other options do not accurately represent the concept of retained earnings. While dividends pertain to distributions made to shareholders, liabilities relate to what a company owes, and cash reserves denote liquid assets set aside for specific uses. Each of these elements plays a role in a company's financial operations, but they do not capture the essence of retained earnings.